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The Danish Supreme Court approves retention bonuses

April 2012 - Employment. Legal Developments by Norrbom Vinding Law Firm, member of ius laboris.

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Pay- benefits - tax
The Danish Supreme Court has held in a precedent-setting ruling that it was not ‎contrary to the Danish Salaried Employees Act that an employee was not entitled to a ‎pro rata share of a retention bonus.‎
In certain situations, employers may need to retain one or more employees until a ‎specified date – for instance, in connection with a business restructure, transfer or ‎similar situations. Many employers therefore choose to reward the employee for not ‎resigning until a specified date. In practice, the employee is offered a retention bonus ‎which will be payable at a specified date if the employee is still in the company’s ‎employment at that point. If, conversely, the employee resigns before that date, no ‎bonus will be payable.‎
However, section 17a of the Danish Salaried Employees Act provides that a departing ‎salaried employee is entitled to a pro rata share of the bonus etc. that the employee ‎would have received if the employee had still been employed by the company. In ‎section 21 of the same Act, it is specified that this protection cannot be varied to the ‎detriment of the employee. Against this background, employers and a number of trade ‎unions have disagreed for some time as to whether it is contrary to the Danish Salaried ‎Employees Act to stipulate in the retention bonus agreement that the employee will not ‎be entitled to a pro rata share of the retention bonus if the employee resigns before the ‎specified date.‎
Restructure of power supply in Denmark
This was also the situation in this case, where a major power supplier had entered into ‎an agreement with an experienced employee for a retention bonus. The reason for the ‎agreement was that the power supplier would be consolidating the control room for the ‎Eastern Denmark power network with the control room for the Western Denmark power ‎network. It was important for the power supplier to maintain the staffing level of the ‎control room which was to be closed until it had been consolidated with the other ‎control room.‎
The retention bonus agreement specified that the bonus was conditional on the ‎employee not resigning until the consolidation was in place. When the employee ‎resigned before that date, the company did not pay him a pro rata bonus. Through his ‎trade union, the employee sued the company for about EUR 50,000, equivalent to a pro ‎rata bonus. The trade union argued that the retention bonus was covered by section 17a ‎of the Danish Salaried Employees Act, which provides that employees are entitled to a ‎pro rata bonus. The company, on the other hand, argued that the retention bonus was ‎not covered by section 17a at all.‎
Retention bonus not covered by the Danish Salaried Employees Act
The case ended up before the Danish Supreme Court. In its judgment, the Supreme ‎Court noted that the retention bonus had been awarded on top of the usual pay ‎elements received by the employee under the applicable collective bargaining ‎agreements – including base pay, holiday supplement, duty supplement, overtime, etc. ‎In addition, the employee had been entitled to the retention bonus if his employment ‎was terminated by the company.‎
The Supreme Court further noted that working in the control room required a ‎considerable amount of training and that it was important for the employer and for ‎purposes of ensuring security of power supply that the staffing level remained the same ‎until the consolidation had been effected. The Supreme Court therefore found that the ‎company had had weighty reasons to make the bonus conditional on the employee’s ‎continued employment.‎
On those grounds, the Supreme Court held that the retention bonus did not constitute ‎remuneration for work performed in the same way as the employee’s usual pay, and the ‎retention bonus was therefore not covered by section 17a of the Danish Salaried ‎Employees Act. Accordingly, the company was not required to pay a pro rata share of ‎the agreed bonus to the employee.‎
Norrbom Vinding notes:
  • that with its precedent-setting judgment the Danish Supreme Court has established that ‎employers are allowed to make a retention bonus conditional on a salaried employee ‎not resigning until a specified date; but
  • that employers who need to retain one or more employees and therefore wish to enter ‎into a retention agreement should consider carefully how such an agreement could be ‎formulated.‎
The power supplier was represented by Norrbom Vinding throughout the court ‎proceedings.
The above does not constitute legal advice and should not be relied upon as such

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